Page 511 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 8. Long-Term Incentives 497

define the composition of the compensation committee, indicating the minimum (and perhaps
maximum) number of members and their relationship to the company (e.g., disinterested, non-
management members). This will be reviewed in more detail in Chapter 10 (“The Board of
Directors.”) The executive plan will contain much of the same material, but again go further,
indicating the respective responsibilities of others as delegated by the compensation committee.
For example, the CFO may be responsible for collecting and summarizing peer company data,
if that is included in the basis of payment. The chief legal officer would be responsible for
signing off on executive agreements. The chief human resources officer may be responsible for
summarizing and presenting the outcomes and proposals to the compensation committee.
Participation. The formal plan will set a wide parameter on the definition of who is
eligible. This may include all employees, outside directors, and sometimes even suppliers
such as consultants in lieu of cash. The document may also state who is not eligible. The
executive plan will likely describe eligibility in more specific terms such as salary, job grade,
organization level, or title.
The shareholder plan may identify subplans (typically located outside of the United
States) that are subject to the same terms and conditions of the shareholder plan except to
the extent adjustments are necessary to conform to local law and regulations. The executive
letter would refer to one of the subplans only if it covered the executive.
The formal plan may also permit, limit, or prohibit awards and options due to leave of
absence, disability, or death. For example, the plan may limit transfers only at time of death
in accordance with estate provisions, or it may permit a more liberal definition and include
transfers while alive.
The executive letter will specifically indicate what happens under each of these situations,
being no more liberal than the shareholder-approved plan and possibly more restrictive.
Both plans may state under what conditions (if any) it will permit the compensation
committee to require the surrender of an option/award in order to receive a new one
(e.g., repricing).

Number of Shares. The shareholder plan will state the maximum number of shares that are
available for use. This may be in addition to unused shares from another still-active plan. A
plan that automatically replenishes used shares from an authorized total is called an evergreen
plan. The formula could be stated in absolute numbers (i.e., always X million shares), in
relative terms (e.g., Y percent of shares issued and outstanding), or a combination of the two
(either expressed as the higher or lower of the alternative formulas). A variation would be to
include a performance factor calling for an up or down adjustment based on either an
absolute or relative measurement. An absolute measure might be 15 percent ROE; a relative
measure might refer to a peer group (e.g., total shareholder return for preceding year in
excess of identified group of companies).
Since options require two to four times as much stock as stock awards, many plans do not
set inside limits on stock awards. However, some shareholder groups will extract a promise
from management to establish a specific inside limit in exchange for a favorable vote from the
institution. The executive plan will detail the number of shares (and other particulars) in the
grant/award letter, specific to each individual.
The shareholder plan will stipulate whether or not shares granted/awarded that went
unused because of forfeiture or lapse of time can be reused in a future grant/award. If this is
permitted, requests for more shares are less frequent. The executive plan may be silent on
this point, as it does not directly affect the executive.